The Links Between Gender, Neurology and Finance

The journey from trader to controversy-sparking professor isn’t one that most denizens of Wall Street make. John Coates, a  speaker at the DLDwomen conference in Munich July 11-12, has held both jobs. And he has parlayed his experiences into research and a new book called “The Hour Between Dog and Wolf” that looks at the measurable physiological differences between men and women and how they respond to risk.His conclusions? Women aren’t risk averse: they just take smarter risks. And companies that get the gender balance right see an improvement to their bottom line.

Coates took an atypical route to arrive at his controversial conclusions. “I was supposed to do science at university, but I took a gap year and did philosophy and humanities,” says the soft-spoken Canada native.

After completing a degree at Cambridge, Coates found himself on a trading desk at Goldman Sachs – the result of serendipity: “I met someone at Goldman who wanted to sit next to someone who could discuss philosophy,” he explains. From there he moved on to Merrill Lynch and then to Deutsche Bank – and found himself in the middle of not one but several defining moments in the markets during the 1990s: the dotcom bubble, Black Monday and the Asian financial crisis.

Another happy accident led him to neuroscience: “I met somebody who was doing a PhD in neuroscience at Rockefeller University,” he says. Coates started ducking out of work on Wall Street during quiet periods and going uptown to sit in on lectures and spend time with that “somebody” — Linda Wilbrecht. Hanging out with her and other neuroscientists led him to call it a day with finance, and he returned to Cambridge to do a PhD in neuroscience.

Having watched risk-taking behaviour up close on trading desks, Coates decided to use that experience as the basis for his PhD. “I began noticing pathologies … traders, normally a prudent lot, were becoming overconfident, placing bets of increasing size, with ever-worsening risk-reward trade-offs,” Coates wrote in an article in the New York Times.

At Cambridge, Coates and his team devised a series of experiments to monitor the hormones that come in to play in a stressful situation on a trading floor. The results of the research suggested that steroid hormones – testosterone and cortisol – could affect how people behave, and how that could in turn drive market bubbles and crises.

What Coates was looking at was the so-called winner effect: when two male animals fight, the winner gets a boost in his testosterone levels, which can give him a clear advantage for the next fight. It’s not just the confidence boost, either; it’s a physical thing: testosterone helps with the blood’s ability to carry oxygen and aids the development of lean muscle.

However, that winner effect can be negative: the big beasts can pick fights they can’t win – or, in the case of traders, they can take ever-riskier positions in the market, thereby driving bubbles.

Coates concluded that “this winner effect, which leads to exuberant, overly-risky behaviour, might not apply to women,” he said in an interview with Informilo.

This was dynamite: it pointed to a clear difference between men and women and how they approach risk. That’s a controversial thing to say, as anything that smacks of biological determinism raises howls of protest.

Coates stresses that his controversial statements are underpinned by hard, irrefutable data. “Saying that biology might have an influence on your life sparks a humanist revulsion. But if you stick to the data, nobody has a problem with it,” he says.

Hard data supports the thesis that financial institutions would do better if they hired a more mixed workforce: older men (whose testosterone levels are lower) and women. He points out that women tend to outperform men when it comes to financial returns – “it’s by something like 1.5 percentage points.”

That’s not because women are more risk-averse, he says, thereby blowing a commonly-held assumption out of the water. “We found no difference between men and women. On the trading floors, women might not like the macho environment, but they like the money.”

He explains that women, rather than being less prepared to take risk, take longer to evaluate risk. “Women prefer a more analytic style of risk-taking,” he says. As a result, women are more heavily represented in slower investment environments such as asset management rather than on the fast-moving trading floors.

This has profound implications for hiring in the financial markets. Right now, he notes, traders “are a really homogenous group. They’re all young males in great shape, and they really see themselves as being like athletes.”

For Coates, the value of his research is that it “bridges the gap between science and the world of work,” as he puts it. “The broader goal is to demonstrate how it’s possible to do science in the workplace – and that it’s also necessary.”

Indeed, the application of pure, data-driven science and empirical reporting appears to prove what many have suspected all along: the banks and the world economy would likely be in far better shape if more women were involved.